Economy
Fitch Downgrades Nigeria to ‘B’ on Weak Fiscal Buffers
By Dipo Olowookere
Nigeria’s Long-Term Foreign-Currency Issuer Default Rating (IDR) has been downgraded to ‘B’ from ‘B+ by Fitch Ratings, with the outlook negative.
In a statement issued on Monday, Fitch noted that the lowering of the rating was due to the pressures on the country’s external finances caused by crash in the prices of crude oil at the global market by coronavirus pandemic.
The Brent crude, under which Nigeria’s oil is priced, sold around $23 per barrel some weeks ago and only last week hit just over $30 when news hit town that Saudi and Russia will likely have discussions about the market situation.
Nigeria depends largely on crude oil sales for external revenue and according to Fitch, the intensifying external pressures raise risks of disruptive macroeconomic adjustment given the country’s “precarious monetary and exchange rate policy setting and lack of fiscal buffers.”
It said the shock will also raise government debt and interest payment-to-revenue ratios from already particularly high levels and lead to a renewed economic recession.
Fitch said the shock will worsen the overvaluation of the Naira and remedial policy actions taken by the Central Bank of Nigeria (CBN), which it stressed will not “suffice to address deteriorating external imbalances.”
The CBN allowed the exchange rate on the Investor and Exporter Window, on which the bulk of foreign-currency (FC) transactions is held, to depreciate by 6.7 percent since mid-January and devalued the official exchange rate by 15 percent in March, the rating agency stated.
According to Fitch, Nigeria’s vulnerability to short-term capital outflows is high given the sizeable stock of portfolio investments in short-term Naira debt securities, equivalent to $27.7 billion (6.9 percent of GDP) at end-2019 and representing around 72 percent of FC reserves at the time.
“Of these liabilities, $14.7 billion was in non-resident investments in the CBN’s open-market operation bills that were attracted by high interest rates and hedging instruments offered to non-residents at non-economic costs under the CBN’s policy of stabilising the exchange rate.
“Continued reluctance to adjust the exchange rate, portfolio outflows and a wide current-account deficit (CAD) will lead FC reserves to fall to 2.5 months of current account payments at end-2020 under our forecasts, well below the historical ‘B’ median of 3.8 months, and their lowest level since 1994.
“We estimate that the CAD will widen to a record level of 4.9 percent of GDP in 2020, exceeding the historical ‘B’ median of 4.3%, under our assumption of only modest depreciation of the Naira.
“Nigeria’s long-standing current account surplus shifted to a deficit of 4.2 percent of GDP in 2019 on an upsurge in imports, chiefly of equipment goods.
“We project the CAD to narrow to 1.8 percent in 2021 reflecting partial recovery of oil prices to $45/b, import compression and tighter restrictions on FC access,” the agency said.
It further said the country’s external finances are highly vulnerable to a further fall in international oil prices below the current forecasts of about $34/b.
It noted that despite the expiry of production caps under the OPEC+ agreement, there is little scope to ramp up Nigeria’s oil production beyond the current assumption of 2.1 mbpd given capacity constraints and the build-up of a global supply glut on oil markets.
“Under a stable oil production assumption, a $10 drop in average Brent benchmark prices below our current projection would cause the CAD to widen by an additional 1.6 percent of GDP.
“Furthermore, the domestic oil sector’s operational breakeven is around $25-30/barrel, based on official estimates, meaning production cuts are likely should oil prices continue to hover well below $30/barrel,” it said.
Fitch further said the collapse in oil revenues and the slowdown in economic activity will take a toll on the government’s already weak fiscal revenues.
“This will be partly cushioned by the devaluation of the official exchange rate, which will boost fiscal oil revenues in Naira terms.
“In addition, the fall in international fuel prices will allow the government to eliminate the implicit fuel subsidy. Nigeria’s fiscal breakeven oil price is high, at $133/barrel under our estimates, given particularly low non-oil fiscal intakes.
“We project the general government (GG) deficit will widen to 5.8 percent of GDP (federal government, FGN: 3.1 percent) in 2020 from 3.8 percent (FGN: 2.4 percent) in 2019.
“There is limited scope for consolidation through spending cuts given fiscal rigidity from payroll and interest outlays, which will represent 150 percent of the FGN’s revenues and two-thirds of its expenditures in 2020. Cuts to other operational outlays and capital expenditures will be largely offset by higher spending on health services and support to sectors affected by the pandemic shock,” it stated.
By Aduragbemi Omiyale
A minority equity stake in Chappal Energies Mauritius Limited has been acquired by a Nigerian energy firm, Aradel Holdings Plc.
This deal came a few days after Chappal Energies purchased a 53.85 per cent equity stake in Equinor Nigeria Energy Company Limited (ENEC).
Chappal Energies went into the deal with Equinor to take part in the oil and gas lease OML 128, including the unitised 20.21 per cent stake in the Agbami oil field, operated by Chevron.
Since production started in 2008, the Agbami field has produced more than one billion barrels of oil, creating value for Nigerian society and various stakeholders.
As part of the deal, Chappal will assume the operatorship of OML 129, which includes several significant prospects and undeveloped discoveries (Nnwa, Bilah and Sehki).
The Nnwa discovery is part of the giant Nnwa-Doro field, a major gas resource with significant potential to deliver value for Nigeria.
In a separate transaction, on July 17, 2024, Chappal and Total Energies sealed an SPA for the acquisition by Chappal of 10 per cent of the SPDC JV.
The relevant parties to this transaction are working towards closing out this transaction and Ministerial Approval and NNPC consent to accede to the Joint Operating Agreement have been obtained.
“This acquisition is in line with diversifying our asset base, deepening our gas competencies and gaining access to offshore basins using low-risk approaches.
“We recognise the strategic role of gas in Nigeria’s energy future and are happy to expand our equity holding in this critical resource.
“We are committed to the cause of developing the significant value inherent in the assets, which will be extremely beneficial to the country.
“Aradel hopes to bring its proven execution competencies to bear in supporting Chappal’s development of these opportunities,” the chief executive of Aradel Holdings, Mr Adegbite Falade, stated.
By Adedapo Adesanya
Afriland Properties Plc helped the NASD Over-the-Counter (OTC) Securities Exchange record a 0.04 per cent gain on Tuesday, December 10 as the share price of the property investment rose by 34 Kobo to N16.94 per unit from the preceding day’s N16.60 per unit.
As a result of this, the market capitalisation of the bourse went up by N380 million to remain relatively unchanged at N1.056 trillion like the previous trading day.
But the NASD Unlisted Security Index (NSI) closed higher at 3,014.36 points after it recorded an addition of 1.09 points to Monday’s closing value of 3,013.27 points.
The NASD OTC securities exchange recorded a price loser and it was Geo-Fluids Plc, which went down by 2 Kobo to close at N3.93 per share, in contrast to the preceding day’s N3.95 per share.
During the trading session, the volume of securities bought and sold by investors increased by 95.8 per cent to 2.4 million units from the 1.2 million securities traded in the preceding session.
However, the value of shares traded yesterday slumped by 3.7 per cent to N4.9 million from the N5.07 million recorded a day earlier, as the number of deals surged by 27.3 per cent to 14 deals from 11 deals.
Geo-Fluids Plc remained the most active stock by volume (year-to-date) with 1.7 billion units sold for N3.9 billion, trailed by Okitipupa Plc with 752.2 million units valued at N7.8 billion, and Afriland Properties Plc with 297.5 million units worth N5.3 million.
Also, Aradel Holdings Plc remained the most active stock by value (year-to-date) with 108.7 million units worth N89.2 billion, followed by Okitipupa Plc with 752.2 million units valued at N7.8 billion, and Afriland Properties Plc with 297.5 million units sold for N5.3 billion.
By Adedapo Adesanya
The Naira continued to appreciate on the US Dollar at the Nigerian Autonomous Foreign Exchange Market (NAFEM), gaining 0.7 per cent or N10.23 on Tuesday, December 10 to trade at N1,542.27/$1 compared with the preceding day’s N1,552.50/$1.
The Central Bank of Nigeria (CBN)-backed Electronic Foreign Exchange Matching System (EFEMS) platform introduced to tackle speculation and improve transparency in Nigeria’s FX market has been attributed as the source of the Naira’s appreciation.
Speculators holding foreign currencies, particularly the US Dollar, have seen the value of their money drastically drop due to the appreciation of the local currency. This is forcing them to dump greenback into the system and take the domestic currency alternative- a move that has seen available FX increase.
Equally, the domestic currency improved its value against the Pound Sterling in the official market during the trading day by N6.81 to sell for N1,955.12/£1 compared with Monday’s closing price of N1,961.93/£1 and against the Euro, it gained N10.84 to close at N1,613.00/€1, in contrast to the previous day’s rate of N1,623.84/€1.
Data from the FMDQ Securities Exchange showed that the value of forex transactions significantly increased yesterday by $228.85 million or 257.2 per cent to $401.17 million from the preceding session’s $112.32 million.
However, in the parallel market, the Nigerian currency weakened against the US Dollar on Tuesday by N5 to settle at N1,625/$1 compared with the previous day’s value of N1,620/$1.
In the cryptocurrency market, Dogecoin (DOGE) lost 4.8 per cent to sell at $0.39116, Litecoin (LTC) depreciated by 3.3 per cent to trade at $110.25, Binance Coin (BNB) went south by 2.3 per cent to $681.44, Ethereum (ETH) dropped 1.6 per cent to finish at $3,671.08, and Cardano (ADA) slid by 0.5 per cent to $0.8837
Conversely, Ripple (XRP) jumped by 5.4 per cent to $2.23 amid a continued shift for the coin with its parent company seeing the benefits of a crypto-friendly regulatory environment for US-based companies.
XRP is closely related to Ripple Labs, a high-profile payments company targeted by the SEC in 2020 on allegations of selling the token as a security to U.S. investors. Ripple fully cleared a long-drawn court case in 2024.
Further, Solana (SOL) expanded by 0.8 per cent to $219.75, Bitcoin (BTC) grew by 0.4 per cent to $97,446.95, while the US Dollar Tether (USDT) and the US Dollar Coin (USDC) remained unchanged at $1.00 each.
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